The Mexican economy continued to perform well in 1999. Economic activity rebounded from a slowdown that occurred in the last quarter of 1998 that reflected uncertainty in international capital markets and low world oil prices. The implementation of sound fiscal and monetary policies during 1999 enabled Mexico to achieve, and in most cases, surpass, the main economic targets established at the beginning of the year.

GROSS DOMESTIC PRODUCT

During 1999, an important recovery of domestic markets and the dynamism of external demand supported growth. The gross domestic product increased by 5.2 percent in the fourth quarter of 1999, and 3.7 percent for the whole year, higher than the original target of 3 percent. Thus GDP in current prices in 1999 reached 4,628,800 million pesos (approximately US$490.99 billion).

The increase in GDP is largely explained by an expansion of total gross fixed capital formation, which grew 5.8 percent in real terms in 1999, mainly driven by private investment, which grew 9.3 percent. This increase was mainly brought about by a 7.1 percent expansion in machinery and equipment spending, and a 4.5 percent increase in construction investment. Total consumption, in turn, expanded 3.9 percent in real terms, reflecting the 4.3 percent growth in private consumption and the more moderate 1.0 percent increase in public spending.

The most dynamic component of the aggregate demand, however, was the export sector, which has become one of the main sources of growth for the Mexican economy. Merchandise exports increased 16.4 percent with their value reaching US$136.7 billion in 1999.

In terms of sectoral performance, the primary sector (agriculture, livestock, fishing and forestry) expanded at a real rate of 3.5 percent in 1999. The industrial sector (mining, manufacturing, construction and electricity) and the services sector (which includes commerce, transportation, communications and financial services) grew 3.8 percent and 3.7 percent in real terms, respectively.

INFLATION

The Accumulated Consumer Price Index grew 12.32 percent in 1999, more than 50 percentage points lower than the official estimate of 13 percent. This was the result of the restrictive monetary policy implemented by Banco de M¨¦xico (Mexican Central Bank), the stability in international financial markets, and the commitment to sound public finances.

EMPLOYMENT

The current economic expansion has had a strong impact in the level of employment. This has resulted in historically low unemployment rates. The number of workers who joined the Mexican Institute of Social Security (IMSS) in 1999 was 706,041, of which 488,071 were permanent members. The total amount of workers covered by the IMSS increased 3.5 percent in 1999, reaching 10, 628,901 workers.

The favorable evolution of the economy drove the open unemployment rate to its historic low of 2.5 percent in 1999, the lowest figure since this indicator was first used in 1985. Furthermore, average real wages increased in 1999, with the largest increases being observed in the manufacturing sector.

EXTERNAL SECTOR

Despite the dynamism of economic activity, recent economic growth rates have not caused external imbalances that may undermine the confidence achieved in the later years. In this sense, in 1999 the current account deficit amounted to US$14.0 billion, equal to 2.9 percent of GDP, lower than the US$15.7 billion (3.2 percent of GDP) registered in 1998.

In 1999, the current account deficit was mainly financed with long-term foreign investment, mainly foreign direct investment (FDI), which reached US$11.6 billion and accounted for 82.6 percent of such deficit. Portfolio investment in 1999, in turn, was US$10.8 billion. The capital account registered a surplus of US$14.1 billion in 1999, 19 percent less than the surplus registered in 1998.

Strong domestic demand in 1999 spurred imports, which grew 13.3 percent to reach US$142.1 billion. Import growth, however, was smaller to the 14.1 percent increase in 1998. Imports of consumer goods in 1999 grew by 9.6 percent, while imports of capital and intermediate goods increased by 18.5 percent and 12.8 percent, respectively.

In 1999, the trade balance registered a deficit of US$5.4 billion, 32.3 percent smaller than the deficit registered in 1998. As a percentage of GDP, the trade deficit for 1999 is equal to 1.1 percent. Total merchandise trade for 1999 was US$278.8 billion, or 57.3 percent of GDP.

EXTERNAL DEBT

By end of 1999, net public sector external debt totaled US$83.4 billion, equal to 15.8 percent of GDP. The public sector¡¯s external debt market amortization for the years 2000 and 2001 are moderate at US$2.1 and US$1.6 billion, respectively. For the last three quarters of 2000, total debt payments (market and non-market) amounted to US$7,769.2 million.

In addition to the improved position of Mexico¡¯s external accounts, the ratio of the stock of total net public debt (internal and external) to GDP has fallen significantly. Year-end total net public debt as a proportion of GDP has fallen consistently from 67.4 percent in 1988 to 37.6 percent in 1994, to 24.8 percent in 1999.

EXCHANGE RATE

The flexible exchange rate regime adopted in Mexico in 1995 has become a significant factor of stability, given the current context of the country¡¯s economy. The floating exchange rate regime has allowed for gradual adjustments to external shocks instead of infrequent but large adjustments, while modifying the composition of capital flows towards longer tenors, and reducing the possibility of speculative attacks. The current arrangement has also prevented large and substantial misalignments of the real exchange rate, maintaining the competitiveness of the tradable sector.

In 1999, the Mexican peso showed remarkable stability vis-a-vis the US dollar. On 31 December 1998 the interbank selling rate closed at 9.9010 pesos per US dollar. A year later, on 31 December 1999, the same rate was 9.4900 pesos per US dollar, which compares favorably with the 10.1666 rate observed in 31 January 1999. On 31 March 2000, the interbank selling rate closed at 9.2610 pesos per dollar.